Exista Right place waiting for the right time

Exista hf. 790

Right place, waiting for the right time

In a relatively short time, Exista has established itself as a financial services company in the Nordic area. We believe that market trends are favourable for Exista's business model in the short to medium term. We initiate coverage with a Buy recommendation and a target price of ISK 38.1.

We believe Exista has positioned itself well; it is in the right place with the right business model ahead of the coming consolidation of Scandinavian and northern European financial markets. We also believe that the symbiotic relationship between the cash-generating insurance and leasing services on the one hand, and strategic investments on the other, will give an edge on the funding side. While this in itself does not guarantee success, it does enable the company to realistically aim for qual-ity targets. We believe Exista can capitalise on this potential.

Exista is the largest shareholder in two top ten financial companies in Scandina-via in terms of market cap – Sampo and Kaupthing. Both of these companies are aiming to expand and can be considered good investments in their own right. Exista's investment arm is a substantial part of its business model. We are optimistic that the financial market will recover from the recent setback in the short to medium term. Exista's cash flow eliminates any risk premium and its strong asset base provides good collateral. We believe this gives Exista an advantage in light of the current li-quidity problems and higher risk premium in global credit markets.

Exista has substantial insurance and asset finance operations in Iceland. We see some room for greater operational efficiency. However, domestic growth oppor-tunities are limited in light of the relatively small and stable market. More impor-tantly, these operations are significant for Exista's business model as they provide a steady cash flow and liquid reserves to use in the investment arm.

The main risk factor in our case is market risk. Given that a large part of Ex-ista's asset portfolio consists of two large stakes in financial stocks, the company is subject to both idiosyncratic risk as well as financial sector risk. The company holds large stakes in four companies, which could lead to liquidity problems.

We initiate coverage with a Buy recommendation. Our excess return model suggests that the company's net present value is ISK 34.1 per share. With a required return on equity of 11.5%, we set our one-year target price at ISK 38.1 per share, implying upside potential of 25% from the current share price.

Kaupthing Research Guðrún Ögmundsdóttir (lead analyst) Haraldur Yngvi Pétursson [email protected] [email protected] + 354 444 6952 +354 444 6961

See important disclosures on last page of this report

Initiation of coverage ▪ Speciality and Other Finance, Iceland 26 September 2007

Buy (Initiation)

Price ISK 30.5 Target 38.1

Share data

Market cap (ISKm) 345,945

Number of shares (m) 11,361.1

Bloomberg code EXISTA IR

Reuter code EXISTA.IC

Average volume 16,543,211 Performance 1M 3M 12M

Abs. perf. (%) -10 -10 30

Rel. to ICEX15 -13 -27 3

Share price performance

Exista hf. ▪ 26 September 2007 ▪ 2

Investment case

We initiate coverage of Exista with a Buy rating and a target price of ISK 38.1 per share, implying upside potential of 25% from the current share price. However, this is still about 5.5% below the price peak of ISK 40.25 reached in 19 July. The main reason for our bullish stance is that we believe that Exista has managed to position itself in the right place with the right business model ahead of the coming consolida-tion of the Scandinavian and northern European financial market, not least in light of the recent financial turmoil. While this in itself does not guarantee success, it enables the company to realistically set its sights on quality targets. Nevertheless, and in spite of management's relatively short track record, we believe that Exista has the means to capitalise on this potential.

Our recommendation is also partly based on valuation of the main strategic holdings, mainly Kaupthing and Sampo, as they appear in consensus estimates for these com-panies. In fact, when consensus target prices of these two main holdings are taken into account, the P/B valuation goes from 1.6 to just 1.2.

Key reasons for our bullish stance

Exista is the largest shareholder in two top ten financial companies in Scandinavia in terms of market cap – Sampo and Kaupthing. Both of these companies are aiming to expand and can be considered good investments in themselves. Sampo has a large war chest and a stated intention to participate in the consolidation of the Nordic banking arena. In fact, Sampo has already built up a 5.5% stake in Nordea. We believe Exista has its sights set on opportunities that will enable it to expand into the Nordic financial market. For example, Exista could provide sup-port to Sampo if the latter decides on an aggressive M&A route. In this scenario, it could gain part of a potential target in the restructuring process. The same applies to Kaupthing Bank, which has been growing fast and now has a firm presence in northern Europe.

Exista has substantial insurance and asset finance operations in Iceland. We see some room for greater operational efficiency. However, domestic growth opportu-nities are limited in light of the relatively small and stable market. However, more importantly, these operations are significant for Exista's business model as they provide a steady cash flow and liquid reserves to use for its investment arm.

Exista's investment arm is an important part of the business model. For example, trading gains accounted for about one third of Exista's income for 1H07. We are optimistic that the financial market will recover in the short to medium term from the recent setback. Exista's cash flow eliminates any risk premium and the com-pany's strong asset base provides good leverage. We believe this gives Exista an advantage in light of the current liquidity problems and a higher risk premium (which we believe might persist) in global credit markets.

Exista's business model gained acknowledgement recently when the company re-financed a quarter of its short-term liabilities on favourable terms (e.g. 130 and 62.5bps over EURIBOR), at the same as time the credit market was showing signs of distress. The company has historically had a front-weighted maturity profile, raising concerns about both refinancing risk and the future cost of capital. These re-financing terms shows that the company is benefiting from its transformation from an investment company into a financial services company.

We consider the ownership structure of the company to be favourable for inves-tors. The largest shareholders have invested heavily and therefore share the same interests as the rest of the shareholders. Management has a good but short track

We initiate coverage with a Buy recommendation and a target price of ISK 38.1 per share

Exista has created oppor-tunities for itself through its strategic holdings in Sampo and Kaupthing

The operational arm of the business model gives Exista access to steady cash flow and reserve that can be use for its investment arm

We are optimistic that the financial market will re-cover and that good in-vestment opportunities will be available

Exista's recent re-financing terms show it is benefiting from its trans-formation into a financial services group


record and the company relies on its investment skills. However, it is important to bear in mind that past performance does not guarantee good future performance.

Risk to our case

The main risk factor in our case is market risk and a possible prolonged downturn and volatility in global financial markets. As such, a downturn could affect Exista's earnings and capital in the medium term, while at the same time opening oppor-tunities for strategic investments.

Further on, given the concentration in Exista's asset portfolio on the large finan-cial stocks, the company is subject to both idiosyncratic risk as well as financial sector risk that cannot be ignored, even though Exista applies the equity method to both of these stakes.

Exista is exposed to liquidity risk as the company currently holds large stakes in four companies. It could be difficult at times for Exista to liquidate these stakes at desired times.

There is also uncertainty in our estimates since a relatively large part of Exista's holdings is in-transparent; no information is available about the trading portfolio and FX reserves. That in-transparency creates some uncertainty in terms of valuation.

Another risk factor relates to Exista's management, since the company relies on its investment skills for the investment operation.

Exista has some operational risk due to its insurance and asset finance subsidiar-ies. The insurance risk mainly relates to underwriting risk or unpredictable devel-opments, many of which are beyond the direct control of the company.

Exista is exposed to some refinancing risk as its borrowings are front-weighted so dramatic changes in credit market terms for the company would have a negative effect on the company.

The main risk factor is market risk

The company is exposed to idiosyncratic and finan-cial sector risk

Liquidity risk as the com-pany holds large stakes in four companies

Management risk due to the investment operation


Valuation

Financial services firms are often valued using the excess return model. By this method, the value of a company is the capital currently invested in the firm in addi-tion to the present value of excess returns that the firm anticipates will be created in the future. Based on this model, we estimate Exista's net present value at ISK 34.1 per share. With a required return on equity of 11.5%, we set our one-year target price at ISK 38.1 per share and initiate coverage with a Buy recommendation.

In 2006, Exista was earning a return on equity of 27% and annualised return on equity for 1H07 was 70%. This past performance has been significantly higher than the company target of 16-25% ROE, which is a reflection of favourable trends in markets in which Exista operates, as well as good strategic positioning.

In our valuation, we estimate Exista's income for this year and the next four years and combine the NPV. The company has a diverse revenue stream derived from in-surance premiums, interest income, capital gains, dividends and participation in the profit of associates. The majority of Exista's total revenues this year, or 64%, has been derived from shares in profits of the associates Kaupthing and Sampo. This does not provide a clear indication of Exista's future revenue stream, since Sampo reported EUR 2.9bn in one-time profit from the sale of its banking services in its 1Q07 report. However, we estimate that about one third of Exista's future income will be generated by shares in associates, 40-45% from investment activities and 20-25% from its operating units, insurance and asset financing.

Exista's trading activities are in many respects similar to investment companies' ac-tivities, but about 40% of the company's income is capital gains.

In our valuation we use consensus estimates for Exista's income from shares in profit from associates. We estimate growth in Exista's income from operating units, insur-ance and asset financing will be around 15% to 10% in 2008 and 2009. We are opti-mistic about further developments on world financial markets providing Exista with good opportunities for its investment activities and estimate return on the company's trading portfolio to be approximately 20% for the next four years. Furthermore, we estimate that there are some hidden values in Exista's books due to its stake in Siminn, which will be listed later this year. Based on this we assume that the return on equity this year will be 35% and return on equity over the next four years will average at 20%, and that the cost of equity will be unchanged over that period. In addition, we assume that Exista's dividend payout ratio will be 15% but it must be noted that the company does not have a dividend policy. We assume that Exista's excess returns will diminish in the future as it is likely that competition for lucrative investments will increase, reducing opportunities for Exista. We therefore assume in our valuation that Exista's long-term ROE will be 16% with a terminal growth rate of 3.75%.

Exista's net present value is ISK 34.1 per share, and with a required return on equity of 11.5% we set our target price at ISK 38.1

We estimate that about 35% of future income will be generated by shares in associates, 40-45% from investment activities and 20-25% from operating units, insurance and asset financing

We assume that the re-turn on equity this year will be 35% and return on equity over the next four years will average 20%, and that the cost of eq-uity will be unchanged over that period


Excess return model – Exista (EURm)

2007E 2008E 2009E 2010E 2011ENet Income 665.1 493.1 576.9 675.0 789.8 - Equity Cost 218.5 283.5 331.7 388.1 454.1Excess Equity Return 446.5 209.6 245.2 286.9 335.6Terminal Value of Excess Equity Return 2378.8Cumulated Cost of Equity 1.1 1.2 1.4 1.5 1.7Present Value 400.5 168.6 176.9 185.6 1575.1Cost of Equtiy 11.5% 11.5% 11.5% 11.5% 11.5%ROE 35% 20% 20% 20% 20%Terminal ROE 16%Termingal growth rate 3.75%

Equity Invested = 1900.2PV of Equity Excess Return 2506.7Value of Equity = 4406.9Number of shares = 11361.1Value Per Share euro= 0.39

ISK/EUR exchange rate 88.0

Value Per Share ISK 34.1

Source: Kaupthing estimates

The valuation is sensitive to changes in assumptions about Exista's future return on equity, cost of equity, the EUR/ISK exchange rate and expected growth rate. The tables below show the effects that changes in these assumptions have on Exista's fair value.

Sensitivity of the valuation for ROE assumptions on Exista's fair value

34.1 12% 13% 14% 15% 16% 17% 18% 19% 20%14% 20.4 22.5 24.6 26.6 28.7 30.8 32.9 35.0 37.015% 21.1 23.2 25.3 27.4 29.6 31.7 33.8 36.0 38.116% 21.8 23.9 26.1 28.3 30.5 32.6 34.8 37.0 39.217% 22.4 24.7 26.9 29.1 31.3 33.6 35.8 38.0 40.218% 23.2 25.4 27.7 30.0 32.3 34.5 36.8 39.1 41.419% 23.9 26.2 28.5 30.9 33.2 35.5 37.8 40.2 42.520% 24.6 27.0 29.4 31.8 34.1 36.5 38.9 41.3 43.621% 25.4 27.8 30.2 32.7 35.1 37.5 40.0 42.4 44.822% 26.2 28.6 31.1 33.6 36.1 38.6 41.1 43.5 46.023% 27.0 29.5 32.0 34.6 37.1 39.6 42.2 44.7 47.224% 27.8 30.4 32.9 35.5 38.1 40.7 43.3 45.9 48.525% 28.6 31.2 33.9 36.5 39.2 41.8 44.5 47.1 49.7

Terminal ROE

Avera

ge R

OE

year

2-5


Sensitivity of the valuation for ROE and cost of equity assumptions

34.1 12% 13% 14% 15% 16% 17% 18% 19% 20%10.0% 29.3 32.3 35.2 38.2 41.1 44.1 47.0 50.0 52.910.5% 27.5 30.3 33.0 35.7 38.4 41.2 43.9 46.6 49.411.0% 26.0 28.5 31.1 33.6 36.1 38.7 41.2 43.8 46.311.5% 24.6 27.0 29.4 31.8 34.1 36.5 38.9 41.3 43.612.0% 23.4 25.7 27.9 30.1 32.4 34.6 36.8 39.1 41.312.5% 22.4 24.5 26.6 28.7 30.8 32.9 35.0 37.1 39.213.0% 21.5 23.4 25.4 27.4 29.4 31.4 33.4 35.4 37.413.5% 20.6 22.5 24.4 26.3 28.2 30.1 31.9 33.8 35.714.0% 19.8 21.6 23.4 25.2 27.0 28.8 30.6 32.4 34.2

Terminal ROE

Co

st o

f E

qu

ity



Sensitivity of the valuation for ROE and growth rate assumptions

34.1 12% 13% 14% 15% 16% 17% 18% 19% 20%2.75% 24.5 26.6 28.7 30.7 32.8 34.9 37.0 39.1 41.23.00% 24.5 26.7 28.8 31.0 33.1 35.3 37.4 39.6 41.73.25% 24.6 26.8 29.0 31.2 33.4 35.7 37.9 40.1 42.33.50% 24.6 26.9 29.2 31.5 33.8 36.1 38.4 40.7 43.03.75% 24.6 27.0 29.4 31.8 34.1 36.5 38.9 41.3 43.64.00% 24.7 27.1 29.6 32.1 34.5 37.0 39.4 41.9 44.44.25% 24.7 27.3 29.8 32.4 34.9 37.5 40.0 42.6 45.14.50% 24.8 27.4 30.1 32.7 35.4 38.0 40.7 43.3 46.05.00% 24.9 27.7 30.6 33.5 36.3 39.2 42.1 44.9 47.8

Terminal ROE

Gro

wth

rate


Sensitivity of the valuation for cost of equity and growth rate assumptions

34.1 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5%2.75% 38.5 36.4 34.5 32.8 31.3 30.0 28.8 27.73.00% 39.1 36.8 34.9 33.1 31.6 30.2 28.9 27.83.25% 39.7 37.3 35.3 33.4 31.8 30.4 29.1 27.93.50% 40.4 37.9 35.7 33.8 32.1 30.6 29.2 28.03.75% 41.1 38.4 36.1 34.1 32.4 30.8 29.4 28.24.00% 41.9 39.1 36.6 34.5 32.7 31.0 29.6 28.34.25% 42.7 39.7 37.1 34.9 33.0 31.3 29.8 28.44.50% 43.7 40.4 37.7 35.4 33.3 31.6 30.0 28.65.00% 45.8 42.1 39.0 36.3 34.1 32.1 30.4 28.9

Cost of Equity

Exp

ect

ed

gro

wth

ra

te


Sensitivity of the valuation for ROE and growth rate assumptions

34.1 12% 13% 14% 15% 16% 17% 18% 19% 20%80 22.4 24.6 26.7 28.9 31.0 33.2 35.4 37.5 39.782 23.0 25.2 27.4 29.6 31.8 34.0 36.2 38.4 40.784 23.5 25.8 28.0 30.3 32.6 34.9 37.1 39.4 41.786 24.1 26.4 28.7 31.0 33.4 35.7 38.0 40.3 42.688 24.6 27.0 29.4 31.8 34.1 36.5 38.9 41.3 43.690 25.2 27.6 30.1 32.5 34.9 37.3 39.8 42.2 44.692 25.8 28.2 30.7 33.2 35.7 38.2 40.7 43.1 45.694 26.3 28.8 31.4 33.9 36.5 39.0 41.5 44.1 46.696 26.9 29.5 32.1 34.6 37.2 39.8 42.4 45.0 47.6

Terminal ROE

EU

RIS

K E

/R



Net Asset Value: ISK 20.5 per share

NAV Exista as of 24 September 2007

Listed Holdings No.Shares Market ISK/ % of Sensi-

(ISK) (millions) Value Share Assets tivity*

Kaupþing Bank 170 1080 184,075 6.90 35.7% 1.62

Sampo 114 20.3 193,817 7.27 37.6% 1.71

Storebrand ASA 14 83 12,607 0.47 2.4% 0.11

Bakkavör 855 66.1 56,526 2.12 11.0% 0.50

Flaga 159 1.43 227 0.01 0.0% -

Other listed holdings 42,476 1.59 8.2% 0.42

489,727 18.37 94.9%

Adjusted ISK/ % of Sensi-

Value Share Assets tivity*

Síminn 21,110 4.1% 0.19

Other unlisted 5,176 1.0% 0.04

18,686 26,286 0.99 5.1% 0.23

Summary Adjusted ISK/ % of

(ISK) Value Share Assets

508,413 516,013 100.0%

-296,154 -296,154

212,260 219,859 19.35

NAV per share ISK 18.68 19.35

Premium 63% 57%

Note: The market value of Exista holdings are calculated at fixed e/r as of 30.06.2007

Price

Total Listed Holdings

Other Holdings

Reported

Value

Net Asset Value (NAV)

13,510

5,176

Total Holdings

Net Cash/Debt

Total Other Holdings

Reported

Value

Source: Kaupthing estimates and company data

Sensitivity in changes in share prices

Listed securities are a large part of Exista's holdings. Although Exista has made changes to its accounting policy and reduced the effect of market exposure on its equity, the performance of its holdings still has an impact on NAV, as listed securities represent 95% of the company's holdings. If the share price of Sampo increases by 10%, then the Exista's NAV per share should increase by ISK 1.71, reducing the market premium by 11%. Changes in Sampo and Kaupthing share prices have the greatest impact on Exista's NAV, as they are the company's largest holdings. A 10% increase in Kaupthing, Bakkavör and Storebrand market values would increase NAV per share by ISK 1.62, ISK 0.5, and ISK 0.11, respectively. Exista has a trading port-folio of undisclosed securities that, at the end of 2Q07, amounted to ISK 47bn. This portfolio includes both Icelandic and foreign securities, and a 10% increase in its market value would add a further ISK 0.42 to the share price and reduce the pre-mium by 3%.

NAV sensitivity to a 10% increase in market value of holdings

Listed Holdings No.Shares Market ISK/ % of Sensi-

(SEK) (millions) Value Share Assets tivity*

Kaupthing Bank 170 1080 184,075 7.26 35.4% 1.62

Sampo 114 20.32 193,817 7.64 37.2% 1.71

Storebrand ASA 14 83 12,607 0.50 2.4% 0.11

Bakkavör 855 66.1 56,526 2.23 10.9% 0.50

Flaga 159 1.43 227 0.01 0.0% -

Other listed holdings 0 0 46,976 1.85 9.0% 0.42

494,227

* Sensitivity indicates NAV per share increase in ISK terms if the stock price increases by 10%

Price

Total Listed Holdings

Source: Kaupthing estimates and company data. Market data as of 24.09.2007

Our net asset valuation indicates that Exista is currently trading at 1.6x its book value


Listed holding updated to consensus estimates

Exista's four largest holdings are in Sampo, Kaupthing, Bakkavör and Storebrand. These companies are covered by a number of equity analysts and consensus esti-mates suggest that outlook for the holdings is relatively good. By changing the cur-rent market value to potential market value, using Kaupthing's or mean consensus estimates, this would add ISK 9.2 to Exista's current share price, reducing the pre-mium to 7%.

Potential market value of listed holdings and the effect on Exista's NAV

Listed Holdings No, Market % of Target Pot.mkt Pot.mkt.

(SEK) Shares Value Assets Price value* value change

Kaupthing Bank 170 1080 184,075 35.4% 1250 213,049 28,975

Sampo 114 20.32 193,817 37.2% 24.5 233,687 39,870

Storebrand ASA 14 83 12,607 2.4% 93.57 14,213 1,606

Bakkavör 855 66.1 56,526 10.9% 72 90,738 34,212

447,025 2.4% 551,687 104,663

Percentage change 23%

Per share 9.21

Price

Total

Source: Kaupthing estimates and JCF


Success – so far

Business model focus

Exista was established in 2001 and was listed on the Icelandic Stock Exchange in September 2006, when Kaupthing bank sold a 14.8% stake in the company. Since its listing, Exista has outperformed the Icelandic stock market, showing a share price increase of 35% compared to 27% for the OMXI15 index.

Exista defines itself as a financial services company operating in the areas of insur-ance services, asset finance and strategic investments. The main theme of the busi-ness model is the mutual interaction of strong-cash-flow operating units and invest-ment activities that are chiefly focused on the strategic and even long-term asset gathering. The synergies created by this alliance benefit both arms of the company as a strong balance sheet facilitates more favourable terms for long-term funding. Furthermore, the operating units as well the depository properties of the technical provisions provide access to a stable cash flow that lacks intermediation risk and spread of they type that would be incurred if this liquidity were served by an unre-lated party.

The investment activities focus mainly on strategic holdings in financial companies, although Exista is open to other options in various sectors with the aim of acquiring well established companies that have growth potential and good cash flow. The com-pany is therefore not interested in start-ups or "turnaround" cases and differs from private equity funds in the sense that there are no limits on how long it holds a cer-tain asset.

Exista's focus is on northern Europe as its core market, with a medium-term target of gaining a strategic position ahead of the consolidation of the financial services sector in that area. So far, Exista has considerable stakes in three Scandinavian financial services companies, Kaupthing, Sampo and Storebrand.

Exista's portfolio Exista's assets compositions

37.2%

35.4%

10.9%

2.4%

9.0% 5.0%

Sampo Kaupþing Bank

Bakkavör Storebrand ASA

Other listed holdings Unlisted holdings

60%13%

10%

8%7% 2%

Investments in associates Assets at fair value

Loans and acc. rec. Assets held for trading

Goodwill Other assets

Source: Kaupthing estimates and company data Source: Company data

High growth in a favourable market environment

Exista's balance sheet has grown immensely, increasing ten-fold over the past two years. At year-end 2004, the company's total assets amounted to approximately. EUR 730m compared to EUR 7.71bn at the end of 1H07. The growth has chiefly been achieved through retained earnings since the company's share capital has only been increased one time since the listing in September 2006. Exista has indeed been prof-itable with a ROE in 2005 and 2006 of 63% and 27%, respectively. This success has

Exista is a financial ser-vices company operating in the areas of insurance services, asset finance and strategic investments

Investment focus is mainly on strategic hold-ings in financial compa-nies or in well established companies with growth potential

The main geographic focus is northern Europe


continued in the current year, as annualised return on equity for 1H07 was 70%. This past performance has been significantly higher than the company target of 16-25% ROE, which reflects favourable trends in the markets where Exista operates as well as good strategic positioning.

The company has a diverse revenue stream derived from insurance premiums, inter-est income, capital gains, dividends and participation in the profit of associates. The majority of Exista's total revenues this year, or 64%, has been derived from shares in profits of the associates Kaupthing and Sampo. This does not provide a clear indi-cation of Exista's future revenue stream, as Sampo reported EUR 2.9bn in profit from the sale of its banking services in its 1Q07 report. However, we expect that about one third of Exista's future income will be generated by shares in associates, 40-45% from investment activities and 20-25% from its operating units, insurance and asset financing. Exista's total revenue for 1H07 amounted to EUR 958m and after-tax profit was EUR 862m.

The company has a large trading book, i.e. financial assets held for trading, which amounted to EUR 643m at the end of 2Q07. Exista's annualised return on this book was approximately 28% in 2Q07, slightly above management's ambitious target of 25% annual return on its trading assets and delivering about 15% of Exista's reve-nues for 1H07.

Revenue mix for 1H07 Growth in assets and liabilities (EURbn)

64%15%

8%

7% 4% 1%1%

Share in associates Held for trading

Fair value changes Insurance premium

Interest revenues Dividend

Other revenues

0.01.02.03.04.05.06.07.08.09.0

Mar-

05

jun.0

5

Sep

-05

Dec-

05

Mar-

06

jun.0

6

Sep

-06

Dec-

06

Mar-

07

jun.0

7Total assets Total liabilities

Source: Company data Source: Kaupthing estimates and company data

Front-weighted maturity profile but excellent refinancing terms

The maturity profile of the company has historically been front-weighted and, at the end of June, about half of outstanding liabilities, or EUR 2,370m, were due within 12 months. However, with a bigger emphasis on financial services, the maturity profile has been extended above three years and has shifted from secured debt to unse-cured funding. The company's target is to increase issued bonds to account for 35% of total liabilities compared to the current 15%. Management states that its funding focus is on diversification, liquidity and maturity.

The company's revenue stream is from insurance premiums, interest in-come, capital gains, divi-dends and participation in the profit of associates


Exista has been able to further enhance its funding position, both in terms of matur-ity and cost, despite the recent turmoil in credit markets. On 31 August Exista signed a EUR 500m senior unsecured credit facility. The term loan has two tranches, a EUR 407.5m tranche for three years at 130bps over EURIBOR, and a EUR 92.5m tranche for one year at 62.5bps over EURIBOR, with an option to extend up to three years at the lender's discretion. Through this facility and a EUR 400m 10-year securitisation transaction completed in September, Exista has been successful in substantially ex-tending its maturity profile and further enhancing the liquidity position. The favour-able terms of the borrowings must indicate the greater importance that is now at-tached to good cash generation in general and a strong faith in Exista's business model in particular.

Maturity profile 30 June 2007 (EURm) Borrowing specified by currencies (EUR m)

16 268

802 1,057

40 12

1,248 1,110

2,133

72

-

500

1,000

1,500

2,000

2,500

Ondemand

0-3months

3months- 1 year

1 - 5years

5years+

2006 30.06.2007

59%24%

6%4% 3% 2%1%1%

0%

EUR ISK CHF JPY USD GBP NOK DKK SEK

Source: Company data Source: Company data

Target maturity profile (EURm) Breakdown of funding historical and target

0

500

1000

1500

2000

1 year 2 year 3 year 4 year 5 year<

2006 2007YTD Target

84%63% 65%

35%

13%

15% 14%

35%

12% 6%8%

4% 5%8%

3% 6% 4%6% 8%6%

0%

20%

40%

60%

80%

100%

120%

2005 2006 2007 YTD Target

Loans Bonds Technical provisions CP MM Repo

Source: Exista's Capital Markets Day Handout Source: Exista's Capital Markets Day Handout

Investment capacity depends on the route Exista takes

Exista's capitalisation has changed in line with a new emphasis on insurance provi-sion and asset financing. The equity ratio was close to 60% when Exista was an in-vestment company, but has declined to about 36.7% as of 30 June this year, or 40% excluding operational liabilities. Although Exista is defined as a financial services company, its investment strategy is opportunistic and many ways in-transparent.

Management does not provide a clear indication of the company's investment capac-ity, its target equity ratios or the extent to which it is willing to leverage the com-

3M Libor EUR

3.43.63.8

44.24.44.64.8

5

1.1

.2007

2.1

.2007

3.1

.2007

4.1

.2007

5.1

.2007

6.1

.2007

7.1

.2007

8.1

.2007

Source: Bloomberg


pany, as investment capacity depends on the direction in which Exista intends to take its investments, e.g. in property, asset financing or insurance. It is clear that while current problems in the global credit markets have had a negative effect on the abil-ity of private equity funds to finance their deals; it has created opportunities for companies like Exista, which, having their own cash flow, are now in a better position to finance a bid.

However, the company's target is to increase its bond issuing significantly, so its goal must be to attain a credit rating above non-investment grade (BBB or above). It is therefore our view that Exista will not strain its balance sheet by increasing its gear-ing significantly.

Exista's equity ratio Financial ratios

0%10%20%30%40%50%60%70%

Mar-

05

jun.0

5

Sep-0

5

Dec

-05

Mar-

06

jun.0

6

Sep-0

6

Dec

-06

Mar-

07

jun.0

7

0%10%20%30%40%50%60%70%

Equity ratio TD/TA LTD/LTD+ LTD/BVE+L

30.6.2006 30.9.2006 31.12.2006

30.3.2007 30.6.2007


Insurance and asset finance business

The Icelandic insurance business

Exista's operational business consists of two insurance companies, VÍS focusing on general property and casualty (P&C), insurance Lífís that is specialized in life insur-ance, and an asset finance company, Lýsing. These three units were acquired in the takeover of the Icelandic company VÍS Holding in May 2006. The Icelandic insurance sector is a highly concentrated market dominated by three local insurance compa-nies. VÍS' market share is currently 35%, with a good distribution of premium in-come. Last year, growth in insurance policies amounted to 8.8% and premium growth was 14.8%, but we believe that domestic growth potential is limited.

VÍS revenue growth 2004-2007 (ISKm) VÍS insurance operations

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07

38%

23%

13%

9%

9%3% 6%2%

Compulsory motor Property

Other motor Accident and sickness

General liability Marine

Re Life

Source: Company data

Source: Exista capital markets day handout

Estimated investment cap.

Target equity ratio

Approx. investment

capacity

35% 400

30% 1,800

25% 3,800

20% 6,300

15% 11,000

10% 20,000 Source: Kaupthing estimates


The market structure for insurance companies in Iceland is favourable with e.g. auto-matic renewals. However, the market is small and price competition has been fierce at times when the companies have been fighting for market share. At the same time, combined ratios in the Icelandic market have remained relativity high, e.g. VÍS' com-bined ratio was 115% in 2006, illustrating the tight margin in the core business.

Exista has stated that VÍS' operational results are satisfactory and measures have been taken to streamline operations, both on the cost side and the income side. The goal for VÍS is to push the combined ratio below 100% in 2007, and the ratio has been gradually decreasing since the acquisition, reaching 100.1% at the end of 2Q07.

Insurance-based financial services play a key role in Exista's business model, as they diversify the revenue stream, provide access to reserves and give a stable cash flow that supports Exista in its investment activities.

Further insurance expansion abroad?

Domestic growth opportunities in the insurance business are limited and future growth will have to be achieved through acquisitions in other markets. The Nordic market is the most likely target market for further expansion, we believe. However, valuations in the insurance sector are currently high for Scandinavian insurance com-panies, and market shares seem to be stable and concentrated. The five largest com-panies account for about 70% of the market in Denmark, with significantly higher market shares in Finland, Norway and Sweden.

Denmark – Market share distribution Sweden – Market share distribution

21%

20%

13%10%

6%

30%

Tryg Topdanmark Codan (RSA)

Alm Brand If Others

29%

20%18%

15%

18%

Länsförsäkringar Sampo (If Skadeförsäkring)

Trygg-Hansa (RSA) Folksam

Other

Source: Sampo capital markets day handout Source: Sampo capital markets day handout

Norway – Market share distribution Finland – Market share distribution

30%

32%

10%

18%

10%

If (Sampo Group) Gjensidige NOR SpareBank 1

Vesta Other

28%

26%19%

10%

9%8%

Sampo (If P&C Insurance) Pohjola (OKO bank)

Tapiola General Fennia

Lähivakuutus Other

Source: Sampo capital markets day handout Source: Sampo capital markets day handout


While consolidation of Nordic financials companies is anticipated, the property & casualty (P&C) companies have not been considered as vulnerable as other financial companies, due to higher valuations. However, it is possible that valuations could change following further equity market correction, but so far the multiples of Nordic P&C companies have not changed significantly.

Exista already owns a 20% stake in Sampo and 5.5% in Storebrand, Nordic financial companies that operate in different segments of the insurance business, and specula-tion has persisted in the market that these companies could be possible acquisition targets. However, Exista does not appear to have a sufficient balance sheet to buy Sampo (market cap. EUR 11.5bn.) on its own, although it could do so in cooperation with others. Acquiring Storebrand (market cap. EUR 2.6bn) would be more feasible for the company, although management has stated that its investment in Storebrand is merely a trading position.

Strong performance of asset financing could be slowing

Lýsing, Exista's asset financing company, is the largest provider of asset financing in Iceland, providing a wide range of financing products to commercial and private cli-ents. The company has been performing well, with income increasing by 34% in 2005 and 43% in 2006. The company's total assets increased by 14% and 60% respec-tively during the same years. At the same time, the cost ratio has been relatively stable.

Cost ratio and growth in assets and revenue Lýsing's profit before tax (ISKm)

-10.0%0.0%

10.0%20.0%30.0%40.0%50.0%60.0%70.0%

1H06 1H07 2003 2004 2005 2006

Cost income ratio Growth in total assets

Growth in total revenue

555 671 682

841

1,233

200

400

600

800

1,000

1,200

1H06 1H07 2004 2005 2006


According to management, the company intends to expand its asset financing busi-ness through organic and external growth. However, the Icelandic economy has been booming for the past four years, showing average annual GDP growth of 5%. Con-sumption and investment have also reached new heights and have grown on average by 7.6% and 22%, respectively, during this period. However, the economy has begun to move to balance. In 2007, Kaupthing expects that economic growth will be ap-proximately 1% and investment is expected to contract sharply. Growth in private consumption is declining mainly due to lower import of cars; the number of new pas-senger car registrations declined by 12% during the first eight months of 2007 com-pared to the same period in the previous year. These factors should lead to a slow-down in growth in Lýsing's income and assets. We do not see much growth potential for Lýsing in the domestic market, so further expansion would be through acquisi-tions abroad, where competition is currently fierce. However, the market structure for leasing companies in Scandinavia differs from Lýsing's model. For example, leas-ing companies in Scandinavia tend to concentrate on specific sectors, while Lýsing's business model consists of providing financial services for a broad customer range.

While we do not believe that Exista will expand its asset financing operation in the near future, Lýsing is currently an important part of the business model, as it diversi-

Lýsing is an important part of the business model, as it diversifies the group's income stream and provides the company with a stable cash flow, benefiting the investment activities.


fies the group's income stream and provides the company with a stable cash flow, benefiting investment activities.

Investment business

Sampo - Strong purchasing power

Exista's strategic holdings in financial companies consist of a 20% stake in Sampo, a Finnish insurance company, and a 23% stake in Kaupthing Bank. Exista is the largest shareholder in each of these companies, but does not have board representation in either. These stakes could provide Exista with strategic alliances in opening up oppor-tunities in the consolidation of the Nordic banking arena.

After the sale of its banking operations in November 2006, Sampo has about EUR 5.5bn in excess capital on its balance sheet awaiting investment opportunities. Initially, Sampo's management gave itself time until the FY07 results to find a use for the cash; if there are no attractive opportunities, it will be returned to shareholders. The board has decided on a repurchase scheme that allows for approximately 4.8% of the total number of shares to be repurchased, at a cost of around EUR 600m. Meanwhile, Sampo purchased a 5.5% stake in Nordea (EUR 1.6bn) and speculation persists that this stake will be further enlarged, fuelled in part by comments by Sampo's CEO that Nordea would be among the biggest gainers in Nordic banking consolidation and that Sampo's holdings in the firm are long-term. It is moreover possible that Sampo will not confine itself to the Nordic region nor to a specific sec-tor.

In terms of how the Sampo holding fits into Exista's plans, we see two main possibili-ties. One is that Sampo is simply a good investment that Exista's believes will outper-form the market. Sampo could for example be the target of a takeover due to its large cash balance and highly cash-generative and stable P&C business. The second possibility is that Exista is eying some collaboration possibilities in the coming con-solidation in Nordic financial markets. Exista could for example support Sampo if it decides on an aggressive M&A route, or acquire certain assets that fit well with its business model in the phase of restructuring following a Sampo acquisition. In any case, Exista does not appear to have the balance sheet to buy Sampo, except in cooperation with another company. Sampo's excess cash could render the use of debt in an acquisition easy, but at the same time Sampo could use this cash in a defensive strategy. Rather than taking over Sampo, we believe that for Exista the two mentioned possibilities are not mutually exclusive and might be simultaneously targeted.

EPS for Kaupthing and Sampo Kaupthing's Assets (ISK billion)

01,0002,0003,0004,0005,0006,0007,000

2000

2001

2002

2003

2004

2005

2006

2007E

2008E

2009E

01,0002,0003,0004,0005,0006,0007,000

2000

2001

2002

2003

2004

2005

2006

2007E

2008E

2009E

Source: Company data and JCF Source: Kaupthing estimates and company data

Strategic holdings in fi-nancial companies are a 20% stake in Sampo, and a 23% stake in Kaupthing Bank

Sampo has a large in-vestment capacity and holds a 5.5% stake in Nordea.

Rather than taking over Sampo, we believe that Exista is eying collabora-tion with Sampo in the coming consolidation of the Nordic financial mar-ket


Long-term investments in Kaupthing

Exista (then SP eignarhaldsfélag) was initially founded in 2001 with the objective of holding shares in Kaupthing Bank and today the company is the largest Kaupthing shareholder, with a 23% stake in the company. The stake in Kaupthing is a core asset in Exista's business model and a long-term investment. Despite this, Exista does not have board representation in the bank. Kaupthing Bank is Iceland's largest bank and for the past six years it has strengthened its international operations through acquisitions and the establishment of subsidiaries. The majority of the Bank's operations take place outside Iceland and, after the acquisition of NIBC is finalised, over 75% of Kaupthing's revenues will be generated abroad. outlook for Kaupthing seems good and is reflected in the relatively positive opinion equity researchers have on the company's stock. According to mean consensus estimates, the target price for Kaupthing is ISK 1,250 per share, suggesting upside potential of 16% compared to the current price of ISK 1080.

Investment in companies with good cash flow

Exista defines itself as a financial services company and, at first glance, investment in food manufacturing company Bakkavör or Skipti does not seem to fit into the busi-ness model. However, although Exista is a financial services company, its investment strategy is broad. It focuses on investment in financial- or good-cash-flow compa-nies, and is not interested in “start-up” or “turnaround” cases. Therefore, holdings in Bakkavör and Skipti fit well into the Exista business model, as both are mature com-panies with good cash flow providing opportunities for further growth.

Bakkavör - Capital employed (GBPm) Bakkavör - Revenues and assets (GBPm)

0

200

400

600

800

1,000

1,200

2000

2001

2002

2003

2004

2005

2006

2007E

2008E

2009E

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Capital Employed RoCE

0200400600800

1,0001,2001,4001,6001,800

2000 2002 2004 2006 2008E

0.00.51.01.52.02.53.03.54.04.5

Total revenue Total Assets Asset Turnover



Exista's largest shareholders are Lýður Guðmundsson and Ágúst Guðmundsson, two brothers who founded Bakkavör in 1986. They acquired 55% of the share capital in Exista in 2002. A year later, Exista acquired two holding companies whose portfolios included the brothers' stakes in Bakkavör Group. As a result of these transactions, Exista became the largest shareholder in Bakkavör and the company now holds a 39.6% stake in the company. Bakkavör Group has expanded its operation extensively for the past year and multiplied its balance sheet and income stream. We believe that Exista considers Bakkavör a long-term investment due to both of sentimental value and a good medium-term outlook.

Skipti - IPO by year end

Exista acquired a 43.6% stake in Skipti (Icelandic Telecom) when the company was privatised in 2005, at which time the company was valued at ISK 66.7bn. One of the conditions that the Icelandic government made for the sale was that at least 30% of the company should be floated before year-end 2007. Kaupthing also participated in this deal, buying 29.1% of Iceland Telecom, and this stake will be floated before year-end.

We believe that the stake in Kaupthing is a long-term investment for Ex-ista

Holds a 39.6% stake in Bakkavör and 43.6% stake in Skipti

Exista's largest share-holders are the founders of Bakkavör


Since privatisation, Skipti has undergone considerable changes, such as an increased range of services domestically and expansion of its operation abroad through M&A. The company's bottom line was negative last year, mainly due to exchange rate fluc-tuations and their impact on financial expenses. Skipti's revenues increased by 30% yoy in 1H07, but EBITDA margins fell to 28% compared to 33% in 1H06. The com-pany claims this drop in margin is due to acquisitions in new IT companies with lower margins.

Net profit and growth in revenue (ISKm) Skipti/Iceland Telecom - EBITDA ratio (ISKm)

-7,000

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

1H02 1H03 1H04 1H05 1H06 1H07

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Net profit Growth in revenues

0%

10%

20%

30%

40%

50%

2000 2001 2002 2003 2004 2005 2006 1H07

0

2,000

4,000

6,000

8,000

10,000

EBITDA Ratio EBITDA


In the time that has passed since the privatisation, competition in the Icelandic tele-communications market has stiffened, especially in terms of mobile systems service, where almost 40% of Skipti's domestic telecom revenues are generated. New com-petitors are also on the horizon, as Nova intends to start providing experimental services in this field. The Executive Chairman of Exista has stated that the company's aim is that the annual return on the capital it invested in Skipti, ISK 13.5bn, is around 25%. This suggests that the value of Skipti has grown by ISK 21bn and that there is a hidden value of about ISK 7bn (EUR 90m) in Exista's books. Assuming that the debt-to-equity ratio has remained unchanged from the time of purchase, it can be assumed that the enterprise value of Skipti will be around ISK 100bn when it is listed.

We do not have sufficient information to accurately estimate the value of Skipti, as the company has expanded its business significantly and has not published any busi-ness plan or budgets. However, the stake in Skipti does not have any significant im-pact on the overall value of Exista, as Skipti's book value is about 2% of Exista's total assets.

Storebrand is an opportunistic investment

Exista announced in the beginning of August that it holds a 5.56% stake in Store-brand. This announcement came in the wake of a permission given by the Financial Supervisory Authority in Norway to allow Kaupthing Bank to own up to 20% of Store-brand shares and has provoked an investigation of whether these two companies are working in tandem to gain control of the company.

Storebrand has indeed been considered a potential takeover target for some time but Exista's management states that its stake in Storebrand is merely a trading position. It is clear Exista has been building up this position for some time prior to the an-nouncement to the Oslo Stock Exchange as Exista purchased the shares in Store-brand at an estimated average price of NOK 76.25. Storebrand's share price has increased by almost 20% ytd and has been trading at an average price of NOK 91 ytd.

Est. profit on investment

ROIEst. profit in

ISK (m.)

-5% -1.3

10% 2.8

25% 7.6

35% 11.1

45% 14.9

Source: Kaupthing estimate

Storebrand price per-

formance (NOK)

50

70

90

110

09.0

6

12.0

6

03.0

7

06.0

7

09.0

7

Source: JCF


Good portfolio outlook

Exista's largest holdings are in Sampo, Kaupthing, Bakkavör and Storebrand. These companies are covered and valued by a number of equity analysts. Changing the current market value to potential market value, using Kaupthing's or mean consen-sus estimates, would increase the market value of Exista stakes in these companies by 23%. This indicates that the outlook for Exista's portfolio of listed assets is bright.

Potential market value of listed holdings updated to consensus estimates

Listed Holdings No, Market % of Target Pot.mkt Pot.mkt.

(SEK) Shares Value Assets Price value* value change

Kaupthing Bank 170 1080 184,075 35.4% 1250 213,049 28,975

Sampo 114 20.32 193,817 37.2% 24.5 233,687 39,870

Storebrand ASA 14 83 12,607 2.4% 93.57 14,213 1,606

Bakkavör 855 66.1 56,526 10.9% 72 90,738 34,212

447,025 2.4% 551,687 104,663

Percentage change 23%

Per share 9.21

Price

Total

Source: Kaupthing estimates and JCF

Exista reduces market impact on its equity

Exista is the largest shareholder in Kaupthing Bank and Sampo Group and views these assets as its core assets in the financial sector. The company believes that market fluctuations do not reflect the long-term nature of these holdings and believes that the underlying performance is more important than the prevailing market price. Therefore, the company applies the equity method to account for these holdings, as this reduces the impact of market fluctuations on the company's P&L. This method was used for the first time in the 1Q07 report, and resulted in reported income for 1H07 being EUR 19m lower than it would have been according to the fair value method.

Strategic holdings in Kaupthing and Sampo represent approximately 70% of Exista's total listed holdings. Despite the changes in accounting policy, the company still has considerable market exposure, as its holdings in Bakkavör and Storebrand and its trading portfolio go through the P&L. However, 15% of Exista's income in 1H07 was from trading gains of proprietary trading and 22% of overall 1H07 revenues were capital gains.

Currently, the value of Exista's listed securities is more than twice the value of its reported equity. However, by applying the equity method on the stakes in Kaupthing and Sampo, the impact of market fluctuations on Exista's equity is reduced. A 10% decrease in the value of Exista's holdings that go through the P&L will lead to a 5% reduction in equity; prior to the change in accounting policy the change would have been approximately 20%.

Increased emphasis on the euro

Exista presented its accounts in EUR for the first time in its 1Q07 report. This change was due to the fact that Exista's operational region is northern Europe, and a large part of the group's revenue, expenses and funding are in currencies other than the ISK and mostly in EUR. Furthermore, Exista considers that most of its growth oppor-tunities in investment and operations are outside Iceland.

Exista's last AGM approved giving the board of directors the authority to issue the share capital of the company in EUR instead of ISK if the Board considers the option feasible. We believe that Exista will do this soon, as technical obstacles have now

Consensus estimates suggest 23% upside po-tential in Exista's portfolio

Exista applies the equity method on its stake in Kaupthing and Sampo, which reduces the impact of market fluctuations on the P&L

These holdings represent about 70% of Exista's total listed holdings

The company's accounts are in EUR from the be-ginning of 2007


been removed. This should make shares in Exista more attractive for foreign inves-tors, as it reduces exchange rate risk.

Investors have high expectations of Exista

Exista has been performing well on the Icelandic stock exchange, and, until the re-cent volatility started, the company was this year's top performer on the market, showing a share price increase of 80%. However, as Exista's assets consist largely of listed holdings, the company's share price has fallen during the recent market tur-moil, resulting in a net increase of 35% ytd. So far this year, Exista's share price has fluctuated broadly in line with those of its largest holdings. At the same time, the company has been trading at high multiples, an average price-to-book value of 1.5x. We believe investors view Exista as a growth stock and that they are buying it pri-marily because of the expectation of capital gains and an interest in the future growth of the company. It seems that Exista has created opportunities for itself through its stakes in Sampo, Kaupthing and to some extent Storebrand.

Exista has a defined strategy of investing in financial companies or companies with good cash flow, but at the same time is able to be opportunistic. It has diversified its revenue stream and has a good, but short, track record. We view the ownership structure as favourable for investors. The largest shareholders have invested heavily in the company and therefore share the same interests as the rest of the sharehold-ers, i.e. dividends and/or value appreciation of their holdings. The Exista story is short and it will be interesting to see how it continues.

Exista's P/B estimated for 2007 YTD Exista's and its portfolio's performance

1.2

1.3

1.4

1.5

1.6

1.7

1.8

12/29/2006 3/29/2007 6/29/2007

60

80

100

120

140

160

180

200

12/06 02/07 04/07 06/07 08/07

Storebrand Kaupthing Exista

Sampo Bakkavor

Source: Kaupthing estimates, JCF and company data Source: Kaupthing estimates, JCF and company data

Exista was this year's top performer on the Ice-landic exchange until the recent market turmoil

The company has a good but short track record


Company overview

Brief history

Exista defines itself as a financial services company that operates in the areas of insurance, asset finance and investments. The foundation of Exista was established when a group of savings banks established SP Eignarhaldsfélag in June 2001 with the objective of holding shares in Kaupthing Bank. Later, Kaupthing Bank joined this group and the name was changed to Meiður ehf. Towards the end of 2002, the com-pany increased its stake in Kaupthing, becoming the largest shareholder in the bank. In the beginning of 2003, Bakkabraedur Holding B.V., a company owned by Ágúst Guðmundsson and Lýður Guðmundsson, acquired 55% of the share capital in Meiður. Since then, the Meiður portfolio has increased substantially and the investment strat-egy has been expanded. In 2003, Meiður became the largest shareholder in Bakkavör Group and in 2004 Meiður acquired a 23.3% stake in Flaga Group. In 2005, Meiður acquired a stake in Iceland Telecom. During the same year, the name of the com-pany was changed from Meiður to Exista and the strategy of becoming a leading investment company in specific industry sectors was implemented. Significant changes were made to Exista in 2006 and the company transitioned from an invest-ment company into a financial services group. By acquiring VÍS Holding, Exista ex-panded its operations to include insurance underwriting and asset finance. In Sep-tember 2006, the company was listed on OMX Nordic Exchange in Iceland. So far this year, Exista has announced that it has built up a 20% stake in Sampo Group, a lead-ing Scandinavian insurance company. Furthermore, Exista has sold its stake in UK-based insurance company IGI Group Ltd, and in June the company announced that it had entered into a joint venture vehicle which acquired a 29% stake in JJB Sports. In August, Exista announced it had acquired a 5.5% stake in the Norwegian insurance company Storebrand.

Business model and operational approach

The company defines itself as a financial services company that operates in the areas of insurance, asset finance and strategic investments. The main theme of its business model is the mutual interaction of strong-cash-flow operating units and the invest-ment arm of the company. The business model is based on gathering assets in the effort to maximise the use of the balance sheet. The group goal is to build a leading financial services company with Northern Europe as its core market.

l


Exista's organisation

Source: Exista Fact sheet

Operating businesses

Insurance

Exista Insurance consists of two insurance underwriters, each with its own inde-pendent organisation. VÍS is non-life insurance company and Lífís is a life insurance provider. Insurance-based financial services fit well with the investment operation, as they stabilise the business and provide access to stable cash flow and funds for the investment operation. However, domestic growth opportunities are limited, so growth must be achieved through acquisitions in other markets.

VÍS (Vátryggingafélag Íslands hf.) is a general insurance company based in Iceland, where it is one of three major insurance companies and has a market share of around 35%. The company specialises in non-life insurance operations, offering full insurance across Iceland for individuals, families, companies, municipalities and insti-tutions. According to Exista, the main operating focus of VÍS has changed from gain-ing market share to increasing profitability. VÍS' annual premium income is approxi-mately EUR 108m, with a good distribution of both premiums and clients. Exista ac-quired VÍS in May 2006.

VÍS - Revenue 2004-2007 (ISKm) VÍS - Current insurance operations

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07

38%

23%

13%

9%

9%3% 6%2%

Compulsory motor Property

Other motor Accident and sickness

General liability Marine

Re Life

Source: Company data Source: Exista capital markets day handout


LÍFÍS (Líftryggingafélag Íslands hf.) is a provider of life insurance and other health-related insurance. The company was established in 1990 and is the third largest life insurance company in Iceland, with a market share of about 20%, as measured in terms of gross premiums. Lífís provides a wide range of insurance, such as life insur-ance, critical illness insurance, unit linked life insurance, and income insurance. Ex-ista acquired LÍFÍS with VÍS and owns 100% of the company.

Non-life portfolio VÍS Life portfolio - Lífís

43%

20%

17%

10%7% 2%1%

Government bonds Equities

Mutual funds Capital guaranteed bondsMoney market Corporate bonds

Real estate

49%

18%

15%

8%7% 3%

Government bonds Equities

Mutual funds Money market

Capital guaranteed bonds Corporate bonds

Source: Exista Capital Markets Day handout Source: Exista Capital Markets Day handout

Asset Finance

Lýsing is one of three leading asset-finance providers in Iceland and offers a range of financing products to commercial and private clients. The company has a market share of over 40% in asset financing in Iceland. Lýsing provides real estate leasing and operating leases to corporations in Iceland, as well as vehicle leasing to individu-als. Iceland is Lýsing's main operating region. Exista acquired Lýsing at the same time as VÍS and LÍFÍS, May 2006.

Lýsing - Changes in fundamental ratios Lýsing clients distribution

-10.0%0.0%

10.0%20.0%30.0%40.0%50.0%60.0%70.0%

1H06 1H07 2003 2004 2005 2006

Cost income ratio Growth in total assets

Growth in total revenue

30%

36%

22%

9% 3%

Individuals Retail and services Contractors

Manufacturing Other

Source: Company data Source: Exista's Capital Markets Day handout

Trading

Exista Trading consists of proprietary trading for the parent company and asset management for subsidiaries. The subsidiaries are regulated entities, VÍS and Lífís, and their portfolio approach focuses on diversification and relatively stable returns. Exista Trading manages technical provisions where the investment objectives in the non-life and life portfolios differ. For the non-life portfolio, the investment horizon is medium to long term, but focus in the life portfolio is mainly on long-term invest-ments. The proprietary trading strategy is mainly aimed at a short-term investment perspective, where focus is on listed securities and money market instruments. The trading approach is defined as opportunistic, i.e. seeking benefit from market oppor-


tunities as they arise. The equity portfolio consists of stocks in 20-40 companies, mainly in Northern Europe.

Trading equity portfolio – Geographic location Trading equity portfolio - Sectors

60%26%

7%7%

Europe Iceland USA Other

28%

27%15%

12%

10%8%

Other Funds Telecom Manuf. Health Financials

Source: Exista Capital Markets Day handout Source: Exista Capital Markets Day handout

Investment businesses

The investment business is divided between strategic holdings in financial companies and holdings in other businesses. Strategic holdings are defined as long-term invest-ments with the goal of acquiring significant stakes, where Exista is an active share-holder, with or without board representation. Currently, two of Exista's holdings are defined as strategic holdings, the stake in Kaupthing Bank and Sampo Group. How-ever, Exista does not have board representation in either of these companies. Exista uses the equity method in accounting for these companies.

Exista's investments in other businesses have no time limit and the strategy is to acquire controlling stakes, either alone or in cooperation with other entities. In this case, Exista aims to be an active owner and to have board representation. Exista's stakes in, among others, Bakkavör, Storebrand, Flaga Group and Iceland Telecom are classified under this part of the business model and are recognised at fair value in Exista accounts.

Strategic holdings in financial companies

Kaupthing Bank is a Northern European bank offering financial services to compa-nies, institutional investors and individuals. These services include corporate banking, investment banking, capital markets services, asset management and comprehensive wealth management for private banking clients. The bank operates in ten countries, including all the Nordic countries, Luxembourg, Switzerland, the UK and the US. In addition, the bank operates a retail franchise in Iceland, where it is headquartered. Kaupthing Bank is currently among the seven largest banks in the Nordic region in terms of market capitalisation. Kaupthing Bank is listed on the OMX Nordic Exchange in Stockholm and Iceland. Exista initially invested in Kaupthing Bank in 2001 and now holds a 23% stake in the bank.

Sampo Group is a Nordic insurer that divides its business into two areas: If P&C Insurance Company and Sampo Life. If P&C Insurance is a property and casualty insurance company in the Nordic region, and also has insurance operations encom-passing the Baltic countries. Sampo Life is a life and pension insurance company operating in Finland and the Baltic states. The Sampo Life Group comprises the Fin-nish parent company, Sampo Life, wholly owned by Sampo plc, and its subsidiaries operating in the Baltic countries. The company also has a subsidiary supplementing the services of If in Sweden. Sampo Group is listed on the OMX Nordic Exchange in Finland. Exista announced in February 2007 that the group had acquired a 15.5% stake in Sampo Group and has gradually increased its stake to 20%.


Other businesses

Bakkavör Group is a food manufacturing company specialising in fresh prepared foods and produce. The group operates 46 factories in seven countries. Bakkavör Group was founded in 1986 by Lýður and Ágúst Guðmundsson, the largest share-holders in Exista. Since its founding, the business has grown significantly and the Bakkavör Group is currently the largest provider of fresh prepared foods and produce in the UK. Bakkavör Group is the market leader in its key market areas of ready meals, pizzas, convenience salads and leafy salads. Bakkavör Group makes over 4,700 products in 17 product categories, which are developed and sold predomi-nantly under its customers' own brands. Bakkvor is listed on the OMX Nordic Ex-change in Iceland. Exista became shareholder in Bakkavör Group in 2003 when Bak-kabreadur, the largest shareholder in Bakkavör Group at the time, was acquired by Exista (then Meidur ehf.). Exista is now the largest shareholder of Bakkavör Group, holding 39.6% of the company.

Storebrand is a Norwegian company with roots going back to 1767. The company is a leading company in the Norwegian markets for pension, life and health insurance, banking, and asset management. Storebrand started selling P&C insurance products to the retail market in late 2006. The Group's activities are carried out through four main business areas: Storebrand Life Insurance, Storebrand Investments, Store-brand Bank and Storebrand Skadeforsikring (P&C insurance). The company is listed on the Oslo Stock Exchange. Exista announced in August 2007 that it had acquired a 5.56% stake in the company.

Skipti provides a full range of telecommunications, mobile, Internet and IP television services to private and corporate clients in Iceland. The company is largely built on Iceland Telecom, a company that was owned by the Icelandic government until July 2005, when it was privatised. Skipti ehf. bought the company for ISK 66.7bn. In December 2005, Síminn, Skipti and Íslenska sjónvarpsfélagið (Television Service Company) merged. Following the merger, Exista became the largest shareholder in Skipti, with a 43.6% stake in the company. Skipti is currently Exista's largest unlisted holding. It is expected that Skipti will be listed on the OMX Nordic Exchange in Ice-land by the end of 2007.

JJB Sports plc is a UK sports retailer. JJB was established in 1971 when it acquired a single sports store in Wigan. By 1994, when the company was listed on the London Stock Exchange, the store portfolio had grown to 120 stores. In 1998 JJB Sports acquired the business of its largest competitor, Sports Division, making JJB the larg-est sports retailer in the UK. JJB now operates approximately 410 stores in the UK. The product ranges include sports textiles, footwear, replica shirts, equipment, ac-cessories, cycles and golfing products. JJB also operates a Fitness Division that con-sists of 48 health clubs. Exista announced in mid-June that it had entered into a joint venture vehicle with Chris Ronnie which acquired a 29% stake in the company that had previously been owned by JJB's founder. Exista's interest in the joint venture vehicle is 50% and Chris Ronnie has the role of Deputy CEO of the company. The value of the investment was approximately GBP 190m.


Exista's income statement, balance sheet and key ratios

Income statement - Exista (€million)Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007

Financial assets designated at fair value through p 125 95,7 - 309 25 38,16 35,30 Financial assets held for trading 22 1,0 3 103,8 110,83 36,40 Dividend 21 0,2 1 58 5,03 6,90 Interest revenues 0 9,1 17 23 18,43 19,30 Insurance premium - 10,5 35 26 35,21 30,60 Share of profits of associates - - - - 457,02 158,30 Other revenues - 1,1 4 2 3,26 3,30 Total Revenues 168,22 73,74 - 367,99 237,47 667,96 290,20

Insurance claims - 7 - 28 - 22 - 26,50 - 24,50 - Operating expenses 2 - 7 - 23 - 18 - 16,68 - 15,50 - Total Expenses 1,58 - 14,14 - 51,22 - 39,42 - 43,18 - 40,00 -

Profit before financial expenses 166,64 87,87 - 316,77 198,05 624,78 250,20

Interest expenses 17 - 21 - 27 - 38 - 56,36 - 78,20 - Net foreign exchange gains (losses) -39,06125 23 - 20 8 - 29,05 52,70

56,41 - 44,32 - 6,48 - 45,78 - 27,31 - 25,5 -

Profit before tax 110,23 132,19 - 310,29 152,27 597,46 224,7

Income tax 3 - 6 8 - 5 - 43,22 3,30 -

Profit for the period 106,79 125,90 - 302,02 147,44 640,68 221,4 185,5

Attributable to:Shareholders of Exista hf. 107 640,74 221,4Minority interest - 57,13 - 0

106,79 - - - 583,61 221,40 Balance sheet - Exista (€million)Assets 2005-12-31 2006-06-30 2006-09-30 2006-12-31 2007-03-30 2007-06-30Financial assets measured at fair value 1 990,2 1 691,6 2 352,6 2 272,7 849,5 991,3 Financial assets held for trading 100,4 293,9 570,6 837,0 478,1 643,1 Loans and accounts receivable - 635,8 680,3 703,8 773,5 769,1 Goodwill - 448,6 497,3 464,8 464,6 511,7 Investments in associates - - - - 4 056,8 4 611,9 Reinsurance assets - 21,2 24,0 15,8 15,7 13,6 Property and equipment - 13,1 14,1 12,2 13,4 28,1 Cash and equivalents 66,5 53,1 62,8 76,1 88,4 109,6 Other assets 8,7 36,8 9,3 12,6 22,2 30,7 Total assets 2 165,8 3 194,0 4 210,9 4 395,1 6 762,2 7 709,1 Equity and liabilitiesEquityShare capital 116,3 111,3 122,1 112,3 120,6 120,6 Statutory reserves 28,9 22,2 24,3 22,8 22,8 22,8 Capital reserves 232,3 723,3 793,4 697,9 892,7 892,4 Translation reserves 1,8 - - - - 24,4 8,4 - Retained earnings 910,8 612,7 984,3 1 061,3 1 578,3 1 799,7 Shareholders equity 1 286,5 1 469,5 1 924,1 1 894,3 2 638,8 2 827,1 Minority interest - 2,5 2,3 5,9 4,6 0,4 Total equity 1 286,5 1 472,0 1 926,4 1 900,2 2 643,4 2 827,5

LiabilitiesBorrowings 876,8 1 386,5 1 923,6 2 183,0 3 668,3 4 575,1 Technical provisions - 262,4 274,1 223,9 278,8 254,8 Deferred income tax liability 0,5 45,2 57,5 60,2 21,1 28,0 Other liabilities 1,9 27,9 29,4 27,8 150,6 23,7 Total liabilities 879,2 1 722,0 2 284,6 2 494,9 4 118,9 4 881,6

Total equity and liabilities 2 165,7 3 194,0 4 210,9 4 395,1 6 762,2 7 709,1

Key Ratios 1H06 1H07 2005 2006Earnings per share (EPS) (cent) -0,42 7,65 3,97Return og equity -2,70% 35,1% 104% 27,10%Price earnings (P/E) 5,4Price to book (P/B) 1,65 1,36Price pr. share in ISK 34,4 22,5Equity Ratio 46,1% 36,7% 59,4% 43,2%Internal value of shares 13,23 23,45 11,06 16,59

Shareholders % of capitalBakkabraedur Holding B.V. 45,21% Chairman Lýður GuðmundssonKista-fjárfestingarfélag ehf 8,94% CEO Erlendur HjaltasonCastel (Luxembourg)SARL 5,10% CEO Sigurður ValýtssonArion safnreikningur 4,76% CFO Sveinn Thór StefánssonEignarhaldsfélag Samvinnutrygg svf 3,53% IR Sigurður Nordal Source: Kaupthing estimates and company data


IMPORTANT DISCLOSURES Company covered: Exista hf. (Hereafter referred to as "This Company")

Planned frequency for updates of report about this Company: 8 times per year Shares held by the analyst(s) and/or close associate in this Company: 0 Other material interest (if any): None This report has not been presented to the Company before publication. * Below refers to recommendations set in Kaupthing's recommendation structure before 22 January 2007. See definitions below Kaupthing has made no change to its recommendation on this company in the past 12 months.

Kaupthing's interests and the Company Kaupthing and its affiliates are market makers in financial instruments issued by this Company. Kaupthing and its affiliates hold no substantial position in financial instruments in the Company. Kaupthing and its affiliates have been lead manager in the last 12 months of a publicly disclosed offer of financial instruments of this Company. Kaupthing and its affiliates have provided investment banking services to this Company over the last 12 months. Description of investment banking services (if applicable): Not applicable Kaupthing and its affiliates have received compensation for investment banking services to this Company over the last 12 months. Kaupthing is not party to an agreement with the relevant Company with regard to research coverage. Kaupthing does not have knowledge of interests or conflicts of interests that other companies within the Kaupthing Group may have with any issuer covered by the Research Department. Kaupthing and its affiliates hold no substantial position in financial instruments in the Company. However, the Company owns a substantial position in financial instruments in Kaupthing Supervisory authorities The lead analyst (see front page) is employed by Kaupthing, which is legally responsible for this report and is regulated by: The Financial Supervisory Authority of Iceland (Fjármálaeftirlitið). Kaupthing operates a system of Chinese Walls in order to control the flow of information within the firm; the Research Department is part of this system. The Research Analysts of Kaupthing receive salary, and are members of the Kaupthing bonus pool. Analysts do not receive remuneration linked to the performance of their recommendations. Furthermore their remuneration is not linked to specific Investment Banking projects. Kaupthing Research Department Recommendation definition Our recommendations are based on a twelve-month horizon, and on absolute performance. Since 22 January 2007 we apply a three-stage recommendation structure where Buy indicates an expected annualised return of greater than +15%; Neutral, from 0% to +15%; Reduce, less than 0%. (Note: Before 22 January 2007, we used a four-stage recommendation structure where Buy indicated expected return of greater than +15%; Accumulate: greater than +5% and less than or equal to +15%; Reduce, greater than -10% and less than or equal to +5%; and Sell, less than -10%.) Current recommendations of the Research Department: (refers to recommendations published prior to this report)

Kaupthing Percent Buy 51% Neutral 41% Reduce 7% Total 100%

SRO Equivalent Percent Buy 51% Hold 41% Sell 7% Total 100%

Generally, investments in financial instruments involve risks. For specific risks related to our various recommendations, please see the latest relevant reports. The target prices on companies in the Kaupthing Research universe reflect the subjective view of the analyst about the absolute price that shares should trade at, within our twelve-month recommendation horizon. The target price is based on an absolute valuation approach, which is detailed in our research reports. The target price can differ from the absolute valuation, in accordance with the analyst's subjective view on the trading or cyclical patterns for a particular stock, or a possible discount/premium to reflect factors such as market capitalisation, ownership structure and/or changes in the same, and company-specific issues. Standard research disclaimer This report or summary has been prepared by Kaupthing from information obtained from different sources not all of which are controlled by Kaupthing. Such information is believed to be reliable, and although it has not been independently verified Kaupthing has taken all reasonable care to ensure that the information is true and not misleading. Notwithstanding such reasonable efforts, Kaupthing can not guarantee that the information contained in this report or summary is accu-rate or complete, and Kaupthing assumes no obligation for, and makes no representations with respect to, the accuracy or completeness of the information contained in this report or summary. Kaupthing assumes no obligation to update the information contained in this report or summary to the extent that it is subsequently determined to be false or inaccurate. The analyst(s) who prepared this report or summary certify that: (1) the views expressed accurately reflect the analysts’ personal views about any and all of the subject securities or issuers; and (2) no part of the research analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommenda-tions or views expressed in this report or summary. This report or summary is provided for informational purposes only and under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy any securities. This report or summary is prepared for general circulation and general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any person who may receive this report or summary. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report or summary and should understand that statements regarding future prospects may not be realized. Companies in the Kaupthing Group may have positions or other interests in the securities that are directly or indirectly subject to this publication. Further information on the securities referred to herein may be obtained from Kaupthing Bank Sverige AB (publ). Performance in the past is not a guide to future performance. Kaupthing accepts no liability whatsoever for any direct or consequential loss arising from the use of this publication or its contents. Investors in the US should be aware that investing in non-US securities involves certain risks. The securities of non-US issuers may not be registered with, or subject to, the current informational reporting and audit standards of the US Securities and Exchange Commission. The distribution of this research report to U.S. persons in the United States of America is made by and under the responsibility of Kaupthing Securities Inc. (regis-tered with the SEC). This research report is only intended for persons who qualify as major U.S. Institutional Investors, as defined in Securities Exchange Act Rule 15a-6, and who deal with us. However, the delivery of this research report or summary to any U.S. person shall not be deemed a recommendation of Kaupthing Securities Inc. to effect any transaction in the securities discussed herein or an endorsement of any opinion expressed herein. Kaupthing Securities Inc. may furnish upon request all investment information available to it supporting any recommendation made in this research report. These materials may not be reproduced, distributed or published by any recipient for any purpose. Please cite source when quoting. We use only sources we find reliable and accurate, unless otherwise stated in the relevant reports. “Kaupthing”, when used in this publication refers to all or any of Kaupthing Bank Sverige AB (publ), Sweden, Kaupthing Bank hf, Iceland, Kaupthing Bank Oyj, Finland, Kaupthing Føroyar Virðisbrævameklarafelag P/F, Faroe Islands, Kaupthing ASA, Norway, FIH Erhvervsbank A/S, Denmark, Kaupthing Bank Luxembourg S.A., Luxembourg, Kaupthing Limited, UK and or Kaupthing Securities Inc., USA. Kaupthing or an affiliate may from time to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicit investment banking or other business from, companies mentioned in this publication for investment banking services in the next three months.

Exista Right place waiting for the right time

Economy & Finance

Transcript of Exista Right place waiting for the right time